Who benefits from bailouts?

Who benefits from bailouts?

Billions for House Builders

by Fred E. Foldvary, Senior Editor

When we have an election year coinciding with a real estate crash, we are sure to see Congress and state governments give billions of dollars to landowners who bought near the peak of the boom, mistakenly expecting their land value to escalate indefinitely, or at least until they sold to a bigger fool.

Of course, there were low-income buyers with poor credit that were deceived into buying a house, and then when the mortgage payment adjusted up, or when their income fell, they suffered a foreclosure. Many tenants are also have gotten hurt, as they have been ejected from their rental home when the property was foreclosed.

But homebuilders are supposed to understand their business. They know that real estate is cyclical. In the late 1980s some house builders got stuck with inventory when real estate fell in 1990. Now its happening again. As in previous real estate booms, house builders overbuilt in the hot markets. Why dont they learn? Because they expect a bailout.

Congress is now crafting a $15 billion real estate bailout. The legislation would refinance subprime loans, give a $7000 tax credit for buying real estate in foreclosure, and give the home-building industry $6 billion in carry back tax breaks. The bill would allow builders to use losses from 2008 and 2009 to offset profits earned over the previous four years rather than the usual two-year time limit. The largest builders would get the most benefit, amount to several hundred million dollars for a big builder.

Why is Congress giving this tax break to real estate developers? The National Association of Home Builders have a PAC (political action committee) which gives money to candidates for government offices. This PAC was one of the top contributors to federal office seekers in 2006. Since the 2000 election, the PAC has contributed $11.3 million to federal candidates and parties.

You can see the money paid to politicians by real estate sellers and homebuilders in the web site www.opensecrets.org, which lists the PACs and industries that finance political campaigns. There are contributions from the national as well as the state Realtor and home builders associations. Among the donors since 1989, the third biggest is the National Association of Realtors, who have given $32 million to politicians, while the National Association of Home Builders is ranked 23rd, having given about $20 million. The finance/insurance/real estate interests – individuals and PACs – have given over $200 million to politicians so far in the 2008 election cycle, according to the Center for Responsive Politics, which hosts the web site. Real estate interests rank fourth in payments to politicians, individuals and PACs contributing $60 million so far in the 2008 election. A $6 billion bailout is a rather good return (100 times greater) on this investment.

We should not blame these special interests, as they are playing the game by the rules the government has laid down, and we cant even blame politicians too much, because they need this money in order to use the mass media in their campaigns. The structure of mass democracy, where millions or many thousands elect a stranger to office, creates an inherent demand for campaign money, which special interests are happy to supply in exchange for favors. Governmental financing of campaigns would just add more money to the pot, and restrictions on campaign financing are either circumvented or else end up stifling free speech. Taxing the profits of house builders is a crazy way to get government revenue, so giving back some of those tax payments would not be so bad if not for the fact that the profits of the real estate boom included huge subsidies as government services pump up land values that the builders then profit from. Builders had huge windfall gains as land prices rose, and they paid taxes on those gains, and now that land values are falling, they get back the tax money.

They should make a movie called real estate gone wild. We have a crazy quilt of taxes, subsidies, bailouts, and restrictions. The natural and simple solution to all this is a single tax on land value that would tap most of the land rent. That would smooth out the real estate roller coaster, and there would be no more bailouts, give-backs, and special favors. Once in place, it would not burden landowners, as what they pay in tax, they save in less mortgage interest.

The real estate crash will not bottom out until land values have fallen from their speculative peaks, and these government subsidies will help some folks but will also prolong the economic downturn. Tax credits, government purchases of foreclosed property, and other bail outs will temporarily prop up land values, but will be overwhelmed by the economic reality that is ultimately more powerful than governments.

– Fred Foldvary

Copyright 2008 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.

We are Hanno Beck, Lindy Davies, Fred Foldvary, Mike O'Mara, Jeff Smith, and assorted volunteers, all dedicated to bringing you the news and views that make a difference in our species struggle to win justice, prosperity, and eco-librium.

3 Responses to Who benefits from bailouts?

I agree with you completely. The NAR is a hydra-headed monster with tentacles in every sector of the economy, political system, legal system, and of course the bought mass media.
I myself was the victim of real estate fraud in 2005, when a sham buyers agent working for Weichert Realty switched roles to become a sellers agent without my informed consent.
To learn more about my case, go to Google and type in “Joel Stern”, then “Weichert”; youll find lots of blogs and web sites about my lawsuit against that company for consumer fraud.
Contact me if youd like more information. My case is typical of the experience of the vast majority of home buyers and sellers shafted by the deceptive practices of the real estate cartel.

Everyone knows this.
This is nothing new.
The real question is why to average and below average people (thats 75% of voters) keep voting for polititian who work against their interests but work for the interests of the few and connected?

The builders certainly didnt have the excuse of “ignorance.” Their trade associations, (national and local), have supposedly educated people running them, lawyers at their disposal, etc. Why DIDNT so many in the industry seem to know that what they were doing was wrong? Were they that inept? I believe they knew what they were doing and did it anyway. It may be impossible to figure out which consumers were so deceived they deserve help getting out of their situation, but I dont believe anyone in the industry can legitimately claim to be a victim.

Advertise here.

Arts & Letters

Geonomics is …

not a panacea, but like John Muir said, “pull on any one thing, and find it connected to everything else.” Recall last month’s earthquake in El Salvador. We felt it and its formidable after-shocks in Nicaragua. Immediately afterwards, my host nation, one of the poorest in the Western Hemisphere, sent aid to its Central American neighbor. The Nica newspapers carried photos of the devastation. They showed that the cliff sides that crumbled had had homes built on them while the cliffs left pristine withstood the shock. Could monopoly of good, safe, flat land be pushing people to build on risky, unstable cliffs? If so, that’s just one more good reason to break up land monopoly. What works to break up land monopoly, history shows, is for society to collect the annual rental value of the underlying sites and resources. That’d spur owners to use level land efficiently, so no one would be excluded, forced to resort to cliffs. To prevent another man-induced landslide is yet another reason to spread geonomics.

about the money we spend on the nature we use. It flows torrentially yet invisibly, often submerged in the price of housing, food, fuel, and everything else. Flowing from the many to the few, natural rent distorts prices and rewards unjust and unsustainable choices. Redirected via dues and dividends to flow from each to all, “rent” payments would level the playing field and empower neighbors to shrink their workweek and expand their horizons. Modeled on nature’s feedback loops, earlier proposals to redirect rent found favor with Paine, Tolstoy, and Einstein. Wherever tried, to the degree tried, redirecting rent worked. One of today’s versions, the green tax shift, spreads out of Europe. Another, the Property Tax Shift, activists can win at the local level, building a world that works right for everyone.

a new policy from a new perspective. Once your worldview shifts — so that vacant city lots are no longer invisible — then epiphany. “Of course! Why didn’t I see it before?” Once you do see the emptiness and what damage it does, how can you ever go back to the old paradigm?

the study of the money we spend on the nature we use. When we pay that money to private owners, we reward both speculation and over-extraction. Robert Kiyosaki’s bestseller, Rich Dad’s Prophecy, says, “One of the reasons McDonald’s is such a rich company is not because it sells a lot of burgers but because it owns the land at some of the best intersections in the world. The main reason Kim and I invest in such properties is to own the land at the corner of the intersection. (p 200) My real estate advisor states that the rich either made their money in real estate or hold their money in real estate.” (p 141, via Greg Young) When government recovers the rents for natural advantages for everyone, it can save citizens millions. Ben Sevack, Montreal steel manufacturer, tells us (August 12) that Alberta, by leasing oil & gas fields, recovers enough revenue to be the only province in Canada to get by without a sales tax and to levy a flat provincial income tax. While running for re-election, provincial Premier Ralph Klein proposes to abolish their income tax and promises to eliminate medical insurance premiums and use resource revenue to pay for all medical expense for seniors. After all this planned tax-cutting and greater expense, they still expect a large budget surplus. Even places without oil and gas have high site values in their downtowns, and high values in their utility franchises. Recover the values of locations and privileges, displace the harmful taxes on sales, salaries, and structures, then use the revenue to fund basic government and pay residents a dividend, and you have geonomics in action.

as unfamiliar as geo-economics. The latter is a course some universities offer that combines geography and economics. A UN newsletter, Go Between (57, Apr/May ’96; thanks, Pat Aller), cited an Asian conference on geopolitics and “geoeconomics”. The abbreviated term ‘geonomics” is the name of an institute on Middlebury College campus and of a show on CNBC. Both entities use the neologism to mean “global economics”, in particular world trade. We use geonomics entirely differently, to refer to the money people spend on the nature they use, how letting this flow collect in a few pockets creates class and poverty and assaults upon the environment, and how, on the other hand, sharing this rental flow creates equality, prosperity, and a people/planet harmony. This flow of natural rent, several trillions dollars in the US each year, shapes society and belongs to society.

the annoying habit of seeing the hand of land in almost all transactions. In geonomics we maintain the distinction between the items bearing exchange value that come into being via human effort — wealth — and those that don’t — land. Keeping this distinction in the forefront makes it obvious that speculating in land drives sprawl, that hoarding land retards Third World development, that borrowing to buy land plus buildings engorges banks, that much so-called “interest” is quasi-rent, that the cost of land inflates faster than the price of produced goods and services, that over half of corporate profit is from real estate (Urban Land Institute, 1999). Summing up these analyses, geonomists offer a Grand Unifying Theory, that the flow of rent pulls all other indicators in its wake. Geonomics differs from economics as chemistry from alchemy, as astronomy from astrology.

an economic policy based on the earth’s natural patterns. Eco-systems self-regulate by using feedback loops to keep balance. Can economies do likewise? Why don’t they now produce efficiently and distribute fairly? The answers lie in the money we spend on the earth we use. To attain people/planet harmony, that financial flow from sites and resources must visit each of us. Our agent, government, must collect this natural rent via fees and disburse the collected revenue via dividends. And, it must forgo taxes on homes and earnings, and quit subsidies of either the needy or the greedy. As our steward, government must also collect Ecology Security Deposits, require Restoration Insurance, and auction off the occasional Emissions Permit. And that’s about it – were nature our model.

in part the Great Green Tax Shift maxed out. Economically, taxing pollution and depletion does reduce pollutants and extracts – and thus the tax base; plus such taxes are regressive, requiring a safety net. On the other hand, collecting site rent is progressive and generates a revenue surplus payable as a dividend to residents, which can serve as the safety net. Environmentally, taxes on waste and extraction do not drive efficient use of land, as does getting site rent.

the Great Green Tax Shift maxed out”
Economically, taxing pollution and depletion does reduce pollutants and extracts – and thus the tax base; plus such taxes are regressive, requiring a safety net. On the other hand, collecting site rent is progressive and generates a revenue surplus payable as a dividend to residents, which can serve as the safety net.
Environmentally, taxes on waste and extraction do not drive efficient use of land, as does getting site rent. Better settlement patterns do reduce extraction upstream and pollution downstream.
Politically, green fees have less impact if applied locally; local is where grassroots movements have more impact. Yet getting rent usually entails shifting the property tax (or charging user fees), the province of local jurisdictions; both mayors and city voters have been known to adopt a site-value tax.
Ethically, putting into practice “tax bads, not goods” skirts the issue of sharing Mother Earth which collecting rent confronts head on. Since nothing is fixed until it’s fixed right, ultimately, greens must lead humanity into geotopia where we all share the worth of Mother Earth.

what you do when you see economies as part of the ecosystem, following feedback loops and storing up energy. Surplus energy – fat or profit – enables us to produce and reproduce. To recycle society’s surplus, the commonwealth, geonomics would replace taxes with land dues (charged to users of sites and resources, including the EM spectrum, and extra to polluters), and replace subsidies with rent dividends to citizens (a la Alaska’s oil dividend). Without taxes and subsidies to distort them, prices become precise, reflect accurately our costs and values; then, motivated by no more than the bottom line, both producers and consumers make sustainable choices. While no place uses geonomics in its entirety, some places use parts of it, most notably a shift of the property tax off buildings, onto locations. Shifting the property tax drives efficient use of land, in-fills cities, improves the housing stock, makes homes affordable, engenders jobs and investment opportunities, lowers crime, raises civic participation, etc – overall it makes cities more livable. Geonomics – a way to share the bounty of nature and society – is something we can work for locally, globally, and in between.